Mr.
LeBlanc: Thank you. Our next panelist is T.
J. Jubeir, founder and Managing Partner of New Horizons Venture Capital. He's got a pretty eclectic
background, if I may say so. Capitalizing on his experience in
structuring and negotiating highly complex, cross-border transactions,
he raised the necessary capital first to launch a leveraged buy-out
firm, Capital
Partners in 1997, and, more recently, the Internet-related
early stage investment firm New Horizons Venture Capital. He founded
and is Managing Partner of both firms with combined assets of
approximately $200 million. He sits on the boards of a number of
companies, has worked in the International
Finance Corporation as an adviser in the Office of the
Saudi Arabian Minister of Petroleum and Mineral Resources and has
represented that country in several high level, multilateral
negotiations, including the multilateral convention on climate change.

t. j. jubeir:investing in geographic scalability

Thank
you, Jim. I will take the approach of a venture capitalist, and an
early stage investor in companies that have an international dimension
or the potential for an international dimension. Let me start with
some brief background on the venture side of our firm to help you
better understand the context from where I'm coming in our discussion
today.

Effectively, we're an early stage investor in the technology
space. We typically come in at about $1 million to $4 million in an
initial tranche, with follow-on that's typically $3-$5 to every dollar
we put in. From our perspective, this approach requires a long-term
commitment to grow the business with our partners.
We fundamentally believe that the international dimension is
critical. We put a premium on growth options, and we look at growth
options as scalability in two ways¾vertical
scalabilities and scalabilities across geographies. Our belief is that
not only do we put a premium on it, but subsequent financiers and
acquirers put a premium on scalability, as well, which improves our
returns in making those investments in the first place. Consequently,
when we evaluate business plans, we seek out those firms that have the
greatest growth options, in particular, those that are scalable across
both verticals and geographies. Most of the plans that we see are able
to show scalability across verticals, but they underestimate or ignore
the international dimensions in the evaluation of the venture itself
and its growth prospects.

In essence, when we look at a business, we look at it from four
factors¾The
international dimension cost across all of them in one way or another,
and I'll pepper in the international dimension as I work through them.
The four factors are: What is the opportunity? What is the context of
that opportunity? Who are the people who are driving the opportunity?
And, what's the deal structure being contemplated and consummated that
will, hopefully, not only support, but reinforce the other elements?

Within the opportunity itself, we define it as a function of a
number of different things. We undertake analysis¾the industry analysis, the competitive analysis, the value sustainability
and all that¾but we fundamentally look at it from four sides. We look at it as a
function not only of cash in/cash out, we also look at it from the
perspective of the risk profile, the timing and then the growth
options. Again, I'm coming back to this notion of growth options. The
international dimension is one that we feel is underestimated and that
we tend to look for. If it's not there, we tend to try to grow it with
our investee companies.

When we turn to the context of a particular opportunity, what
we are really asking is, “What is the particular and general
environment of that opportunity?” We're looking at the macroeconomic
environment, the fiscal environment, tax environment and any sort of
special regulatory environment. Once you introduce international
elements to the story, which may be present already or are about to be
made present, you start to get into more exciting areas relating to
foreign exchange issues, interest rate issues, currency risk,
political risk, repatriation of profits, varying customer profiles,
varying buying powers, cultural issues and so on. They all play an
important role.

The third factor that we look at relates to people. Who are the
managers? Who are the entrepreneurs that are involved? Who are the
advisers, the directors, the service providers and partners in the
venture? What kind of skill base do they bring? What kind of
competencies, context and relationships do they have? What kind of
leadership and management skills? This becomes especially critical in
a strategy that pursues international elements because you are
superimposing a different level of complexity upon the organization.
Originally, you had a functional and, presumably, business units
dimension to the company, but now you're adding another dimension of
geography. The question is, how do you manage it? How can you manage
it without losing focus on the core of the business, especially when
you're an early stage company trying to grow to the next stage?

The deal side is the factor we have the greatest influence on
as an investment company, and it is also the one that's the most
intriguing for me. It’s one that’s the most exciting from the
perspective of what it tells you about the people you're involved
with. What kind of risks are they willing to assume? What are they
stating by taking certain preferences in their positions? Obviously,
there are a lot of elements within the deal structure that are pretty
standard, such as those relating to preferences, capital
commitments, liquidation rights and all that. We tend to focus on the
structure being proposed and the structure we're trying to promote,
one that's conducive to allowing us to bring in future investors. If
we're trying to grow the international side at one stage or another,
it probably leads to bringing in a foreign-based fund. That’s
because we see our expertise in leveraging our capabilities to grow or
extend into the international arena, not in trying to make the
international arena your core business. As a US-based entity, that's
not the kind of capability we have residing here.

With our investor base, contacts and relationship, we try to
help our portfolio companies enter foreign markets by helping them in
better assessing which markets to go after first and how to enter
those markets. Some of those challenges involve asking what market
makes sense for them? Is it the one with the greatest potential
consumption? Is it the one that's the easiest to enter? Is it the one
that's most similar to your own? That gets into the issue of context
when you're dealing with the big macroeconomic or environmental
issues. We tend to look at it from the perspective of optimizing the
selection, helping our portfolio companies to identify the markets and
leveraging our relationships, including those with our limited
partners, which include offshore investors. We try to leverage that in
our portfolio companies as a way of introducing them into the foreign
markets and proving to the next round of financiers that you've got
something scalable, not only across verticals, but also across
geographies.

Then there is traction, because, for us, the most important
thing in the international dimension is being able to prove that
you're pursuing a systematic, sustainable, international approach.
You're trying to prove that this is a business that is scalable across
geographies. We’re also trying to avoid the “one-off”
opportunities. They're great from a cash flow perspective, but they
don't really prove the viability of the international dimension. We
put a tremendous premium on businesses that are able to prove that both
growth options are available, including the fact that the company has
done something to show us that there is some traction in the
international arena. That's when we come in and try to assist.

The international arena is not an easy arena to enter, however.
It's got its complexities, as I mentioned earlier, with respect to
figuring out which segments you want to enter and how. Do you want to
enter it through a joint venture? Through a partnership? Through
building your own resources? Through acquiring somebody local? There
are a lot of issues relating to all that, and there are complexities
to running the business with respect to the strain it puts on an
organization. We try to help by alleviating some of that strain and
saying, “Let us help you get into those particular markets, prove
the early traction internationally and then use it as a base as we
move forward in the next round of financing to further develop that
story.”

We are fundamentally true believers in the international
dimension, and we tend, pretty much, to look only at deals that have
the potential to grow that international element. A company may not
have it today, but we want to be able to sell it as part of the next
round of financing¾not
just as something that's out there, but something that we can actually
work on between now and the next round. Thank you.

Mr.
LeBlanc:
Now, it's my pleasure to introduce Mario Morino, Chairman of the Morino
Institute and founder of Legent Corporation, a company that
grew to become the world’s seventh largest software company by the
time of its acquisition. Mario is a technology investor and advisor, a
great champion of this region and a driver of the kind of
entrepreneurial spirit that everyone here in the audience exhibits.

mario morino:war stories from a veteran

First,
thanks to the panel. There were a lot of very good insights presented,
and we very much appreciate that you were able to participate today.

I have a number of comments stemming from what I lived through
as our business grew internationally. I want to go through this with
you and tie it into what some of the panel members discussed, but I
also want to point out that some of my comments may be, to a degree,
out of date because I haven't been in the field for a while. I think
that the last time I was actually involved with international business
was in 1992. At the same time, however, I'm a Special Partner with General
Atlantic Partners, which is the largest global investor in
information technology and the Internet in the world today. Because of
that involvement I am blessed with access to partners around the world
and in-depth analysis. At least once a quarter, I get the benefit of
the firm’s perspective from people who see how rapidly international
markets and businesses are changing, and, I might add, who see how
difficult it gets. With that, I'd like to touch on a few points.

First of all, I think that “global” is probably one of the
most misused and misunderstood terms. Please understand that very few
firms are global. “Global” means that when you do anything,
you are thinking worldwide in every possible step of your business,
from how you write code to how you do distribution. You can probably
count on two hands the truly global businesses in the high tech
industry. Most firms are really “international,” and they serve
specific markets in the world, reacting to them individually, and, at
best, aggregating this activity to a corporate level. That's not
wrong, but that’s not being global. I'm just telling you to be
honest about it because people who know will spot it in your
literature, especially outside the US. The minute you go beyond the US
saying that you're “global,” it's amazing how fast you will lose
credibility in a sophisticated buyer's mind. It's very important to be
honest about what you are and how you're penetrating international
markets. Again, there's nothing wrong with that because most
businesses today, even Fortune 500 businesses, are simply aggregation
strategies in various regional markets on a global basis. But, it’s
not a global strategy by definition.

I think it's important to understand that simple, basic point
about who and what you are as you go overseas in all directions. For
example, I don't know if it’s still true today, but the firm that I
admired in the technology field was Hewlett-Packard.
When you went to the West Coast, chances were, if you were talking to
one of their three or four top executives, they were from a different
part of the world. These were people who, anytime they acted, it
appeared from a global perspective. They didn't think “US” at all;
they thought globally, and you could see it in their dialogue and
their actions.

The thing I want to warn you about is that what normally
happens when you go outside the US with your business¾and I will be so brash as to say it probably happens to 95 out of 100
businesses¾is that you are a US-centric business that thinks about international
business as an afterthought. I'm going to talk about how you can work
against that and how you can develop your management strategies to
function more effectively internationally.

From a startup point of view, the thing that's the most
relevant is to point out the enormous international opportunities. In
fact, one company based in this region, Landmark
Systems, basically focused on Europe first. They made their
money that way and came back into the US. That's a very different kind
of thinking for a lot of people. I've got to tell you, also, it is
just loaded with traps and pitfalls beyond belief. You’d better be
ready when you do it because it's a very seductive process, and, in a
seductive process, to be very candid, you can get screwed real easily.
I'm going to take you through some of the ways people have done it,
and there are some scars from the process.

First of all, be very focused in how you move outside the US.
It is dangerous, for example, to go after different markets at the
same time. Know what markets you're going after, and I'm not talking
about demographics. To say that you’re going after the “European
market” is generally too broad a statement. You're going after very
specific markets in Europe. Very seldom does a startup, or even an
emerging business of significant size, say that they’re putting the
whole European market in play. Based on the nature of your product,
you may be starting a German-centric marketing effort, or an
Italian-based marketing effort or a UK or Scandinavian country-based
effort, but you very seldom say all of Europe. That’s because, as
was pointed out, the cultural differences, issues, tariffs, taxation,
etc., all tend to complicate things, and that doesn’t even touch on
issues of talent and getting people who know the markets intimately.
I'm just dealing with Europe in that example without even touching the
Middle East, the Far East, South America or Africa. All these are
radically different moves for you, and, I'd argue that they’re very
difficult to take on concurrently. You don’t have to do it all
slowly, but be very methodical in your sampling.

I think, also, that one of the traps is to assume that there's
a model of doing business globally. I'm going to give several models,
and I'm probably just scratching the surface; I defer to the panel on
this. If you're a telecommunications business today, your business is
remarkably different than, for example, an enterprise software
company. It’s night and day, and you can't even make a comparison.
Telecom is totally constrained by regulatory and political issues,
whereas the enterprise software market is almost devoid of that in
many cases. As a result, the talent you bring on board and how you
build the organization are very different. In a similar respect, if
you're an integrator like EDS
or TRW/BDM,
there’s an entirely different set of issues. You're dealing with
multi-million dollar contracts and trying to get high visibility in a
country. And all of this is very different, again, in a consumer
business operation. I would argue that
telecommunications/infrastructure, commercial software, systems
integration and content/consumer require radically different business
approaches. You're going to have to align, learn and find somebody in
your space to see how they've done it. What somebody else has done in
other models cannot necessarily be transferred to yours.

When it comes to demographics, “know your markets” may
sound basic, but things are so much more advanced today than when we
had to face it. You have to know your penetration rates and where the
potential sales are. The information is there. You have to find out
where the money is moving in your space. Forget all the grandiose
numbers; you have to look at the market reality of where you are,
where the demographics best fit, what you're trying to sell, what
you'll have to put in place to sell it and how you will support what
you sell effectively in that market.

Some questions were brought up about management, and I think
that is essential. Going international without an international
understanding is difficult, to say the least. One of the first things
you have to do is hire somebody who is your “international”
person. You've got to have that person onboard, and they've got to
breathe, sleep and eat with you. I can't say it any more clearly. If
you want to be international, this person has to begin to
“culturalize” your team to think beyond the US. I can tell you
story after story where we did something, and it was defined
subconsciously to a North American marketplace. International can’t
be an afterthought. We thought we could tweak what we were doing for
France or Italy, but we missed things in doing that. If somebody had
been with us at the time, we would have caught some very simple things
early. Instead, we paid the price in the field, and it's a hard price.
Right away, get somebody who understands the international markets as
the interpreter for your management team. This person must be an
advocate for your markets and customers outside the US, just as a
salesperson should be your customer's advocate.

I can't emphasize enough how easy it is to seduce yourself into
thinking that the world revolves around the US. You can say that you
believe otherwise, but I'll tell you something¾doing
it in execution is extremely difficult for even the most liberal
minds. You need somebody there who knows these other markets and is
constantly prodding you; someone who’s a total pain in the butt all
the time, helping you realize that you're being myopic in your
management practices¾human resource practices, payroll issues and more. I'm talking basic
issues. Go ahead and try to fire somebody in Germany. Start right
there and try to learn how that works for the first time. All of a
sudden, you realize that you have a whole country office down for 12
months because you thought you could deal with it the way you do in
the US. Now, all of a sudden, bingo, you're out of luck. It changes
your recruitment policies, and you'll be much more diligent in how you
recruit in other countries because the cost of exiting is much stiffer
than in the US. It affects a lot of things, including your reputation,
by the way.

To the question of how you run the organization, everybody does
this differently, but I can't emphasize enough the importance of
face-to-face contact, even in the virtual world. In our case, we had
quarterly meetings with all executives. No matter where you were in
the world, you came together in a quarterly meeting. Period. Those
meetings rotated, and we made sure that they were occasionally in
countries other than the US, both for substance and symbolism to our
client base and to all of the hundreds of people we had working in
other countries. At least one board meeting a year should be someplace
outside the US, preferably in one of your largest markets; and, when
your board is there, leverage the members with your top clients. You
have to have the face-to-face presence. If you're a CEO and you're
doing business outside the US, you’d better believe you're going to
be in an airplane. It's not unusual to be in Europe for a day, then
back here for a day. That's your business. If you're going to sell
internationally, you're going to be in an airplane or you don't belong
as CEO. I'll be that blunt about it. That's your life, and you've got
to be where your markets are. At the end of the day, you've got to
understand your client, and your clients are very different in
different parts of the world. You can have your infrastructure here,
but having the empathy to deal with your marketplace is crucial.

There are subtleties as you expand out. Let's start with perks.
If you go overseas, at least in Europe, every executive gets a leased
car or they won't come to the table. They won't even talk to you. Then
listen to what they ask for in their offices. Mansions. I'm not
kidding. They are mansions. If you go to some of the international
headquarters of US firms, even mid-sized firms, you’ll see palatial
estates. That's the way business is done there. It's not unusual for
somebody to say, “You're going to hire me? I'm the first person to
run Europe for you? Here’s what I need. There's a lovely castle
right outside Scotland that would be a perfect headquarters for us,
and, by the way, we need a fleet of BMWs.” Now, try to resolve those
perks with your US executives. You've got to tell them that it's the
cost of doing business in that country.

Issues like monetary exchange and taxes are profound. Don't
assume that your CFO understands them, because you can lose. You can
set up an entire operation in one part of the world, then take a total
shot in your profits because you did not anticipate monetary exchange
or do your hedging in your forecasting. Hedge management and tax
management on international business are crucial. And, again, it’s
typically the type of thing that is learned in process as opposed to
having it aggressively defined up front. That’s a very costly way to
do it. Think it all through for your type of business. It definitely
differs by the types of markets or models you're in.

The previous comments about culture the other speakers made
couldn't be more accurate. You’d better believe that the sales
cycles are different, they are longer and they involve a lot of
things. If you go to Japan, you’d better be ready to sit and drink
like you never have in your life for lot of nights in a row. That's
not a social criticism, just a fact of life, a mode of business. If
you're in certain parts of Europe, you're going to go to lunch at some
of the finest restaurants you've ever seen, and you're going to spend
two, three hours at a minimum. It's going to be slow. If you rush it,
you're going to come across as the superb “ugly American.” They're
going to mark you, and word is going to spread quickly. They'll know
who you are, and that's why you get executives who understand the
culture and can sell to it. On the other hand, don't let them play
you, either. They know that you're green, so they'll push you for
every one of the luncheons and palatial estates and BMWs that they can
get out of you. There's a balance in there, but you don't want to take
the American view that says, “Hey, we do business this way, and
we're going to do it the same way in that country.” The road kill is
enormous on that subject. Spend time, as an individual, getting to
know the culture you're going to do business in. Have that common
courtesy. I've been embarrassed many times in my career seeing how
other Americans act in foreign countries. It’s a lack of courtesy in
not having come to understand and respect the culture. That's why it's
important that you don't just speak English. You don't necessarily
have to speak the native tongue yourself, but your people in that
country absolutely have to. If nothing else, it’s pragmatism, but
it's also a cultural respect.

Now, some other nuances. In certain countries lineage is
critical. The reason McKinsey
& Co. is so entrenched in Germany is that they are
linked to the major families there. In certain countries you’ll find
that the lineage of certain businesses and certain personalities is
crucial to how the culture moves. It goes even further when you get
into government issues. Sometimes, you have to get in and read tea
leaves. It is not just Marketing 101, there are a lot of nuances
involved in different markets. Nationalistic spirit is one, especially
in the Far East. Go over to China or India and listen to their
reaction to domain name discussions involving ICANN.
They are ferociously, vehemently against the US model and they'll tell
you, “Forget it. We're big enough. You think you're going to do it
your way? Do you know how many Indians we're going to register on the
Internet? How many Chinese? We'll dwarf you.” And chances are they
will. You want to respect the strength of the nationalistic spirit,
just as you want to respect the culture. It goes to how you're going
to develop the mode and culture of your business working globally.

There was a comment made earlier about agents and distributors,
that they’re not necessarily a safe haven. A better phrase would be
that they’re probably a box of Hell. Agents and distributors are
absolutely necessary in channel relationships, but you’d better do
really strong due diligence. This is a lot more defined than it was 20
years ago, but I still come back to the issue of being seduced. If you
haven’t been there, or even if you have, you'll get a suave person
coming through the door who will give you a song and dance. You're
going to think that he or she knows the market, but you could be
talking to the biggest jerk in the country. You really have to get in
there and understand who you're doing business with.

The issue of trust internationally is vital because you're here
and they're there. We heard of a country manager kidnapped. We had at
least two countries where the numbers were cooked. We had the issues
of payoffs. Go down the list and it’s fraught with problems. Who you
recruit, the integrity of the people you put in place, the
relationships you build with them and how you set your checks and
balances becomes vital. You don't want to be a public company, or one
trying to go public, with all your forecasts ready and your numbers
looking good, then, all of a sudden, have someone realize that they've
been baking the numbers on you. You're supposed to be at $2.4 million
in net profit coming out of three countries and it’s really at about
$100,000. You have just gone down the tubes. Everybody else in the
rest of the world has worked hard, the US numbers are strong, the
Japan numbers are strong, Australia did well and, bingo, two guys in
some European country cooked the books. You are dead meat.

As I said, it means that you have to travel. You have to know
your sales staffs well and trust your managers. You have to create
this seamless relationship with a lot of people, and you, personally,
have to know your leading clients and investigate the major deals. Too
much is at stake and the distance is too great. You want to
incentivize and trust. You've got to get people you can absolutely
depend upon, and, if you see one ounce of an issue, execute and move
on it as fast as possible. And “execute” often means terminate if
there was a “taint.” You cannot afford to do otherwise. It's too
far away and the down cost is too great to have those failures. When
they hit you, they hit you at the absolute worst times, like the end
of the quarter or in your end of year numbers.

I know that I'm giving you the dire side, but you can also
build a very good agent/distributor network. What you need is somebody
running distribution who understands the development of agents and
distributors and who has first-hand knowledge of those relationships
on a global basis. If they don't, they have to know who does so that
they can pierce through all of the falsehoods. You don't want to get
into a situation where you've just done an agreement, then realize
that the agent is marketing two competitive products. This happens. At
least know in advance what the conditions are and what the performance
clauses need to be for your sales.

One last note about languages. One of the misconceptions about
technology, especially distributed technology, is that it's just about
translating code and translating words. Internationalization can have
fundamentally different design premises to it. Some astute work is
being done in the internationalization of code today, and someone on
your team has to be assigned to that process if you're going to work
on a global basis. There are parts of the world where how you bring up
screens and the order in which you bring up menus and pop-up windows
are different culturally. It has nothing to do with language. Then
there are language issues, as well. We always used to do simple
things. For example, when we posted something like a product brochure,
our marketing team would post it up on the server for our major
markets. Then we’d get a first-level translation put up with the raw
text and all the raw graphics. A country marketing team in France or
Italy or Japan could take it all down, move it around, refine the
translation and quickly tailor it for publication in that country.
That was 15 years ago. It's just using common sense and realizing that
things have to be tailored for the marketplace. That's what we're able
to do in the global business economy.

In summary to all this, I would start off by saying: assume
nothing. Assume absolutely nothing about working outside the US.
Orient your team from the get-go before you even start. Bring the
right people in. In this region, by the way, you have a number of
people who have a very good understanding of international business.
The systems integrator market is a classic case where you could find
at least 15 or 20 people who are true experts. You've got people here
who are playing international on the services side, and you've got
telecom companies and people running distribution on a worldwide basis
from here. Get them on your advisory board. One thing I would suggest
to a startup is to get somebody on your advisory board who understands
international business. They're likely a good business person to begin
with, but they’ll also give you insights as to when to finally go
international. Orient your management team to what life is like
working out of the US. Do your homework. Understand what markets
you're going to go into, in what order and what it's going to take to
deal with those markets. One of the big fallacies today, in some
cases, is that the Internet gives you a global business setting. Even
with the Internet, it’s all about relationships, the nationalistic
issues, the legal issues and a half-score more. There are now
companies that specialize in taking online businesses and helping them
understand the culture by country and market.

Finally, stay very close to your markets and stay very close to
your executives, then execute like a fanatic. In the US, you've got
some recovery when things go bad because you're so close to it and you
understand the markets. Over there you don't have this luxury of
proximity, wherever “over there” is. As the CEO, you've got to
stay very close to execution yourself, and your management team must
get assimilated into the entire global thinking process.

Thank
you, very much. I'd like to thank the panel again and thank everybody
for coming. Good luck and happy holidays.

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